Figure 32-2

-Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 32-2 from D₀D₀ to D₁D₁.Fiscal authorities who wish to restore real GDP to the full-employment level will

Question

Figure 32-2

-Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 32-2 from D₀D₀ to D₁D₁.Fiscal authorities who wish to restore real GDP to the full-employment level will

Quizplus · Accepted Answer

A contractionary monetary policy has reduced aggregate demand and caused a recessionary gap. To restore real GDP to the full-employment level, expansionary fiscal policy is needed. Option A is not the best choice because it will further reduce aggregate demand and prolong the recession. Option B is not the best choice because a balanced budget will not increase aggregate demand enough to close the recessionary gap. Option D is not the best choice because fiscal policy is a separate tool from monetary policy and can be used to counteract its effects. Option C is the best choice because a budget deficit caused by tax cuts or increased government spending will increase aggregate demand and help close the recessionary gap.

Figure 32-2 ​

Figure 32-2